We Think Orient Semiconductor Electronics (TWSE:2329) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Orient Semiconductor Electronics, Limited (TWSE:2329) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Orient Semiconductor Electronics

How Much Debt Does Orient Semiconductor Electronics Carry?

The image below, which you can click on for greater detail, shows that Orient Semiconductor Electronics had debt of NT$1.37b at the end of December 2023, a reduction from NT$2.15b over a year. But it also has NT$3.91b in cash to offset that, meaning it has NT$2.54b net cash.

How Strong Is Orient Semiconductor Electronics' Balance Sheet?

We can see from the most recent balance sheet that Orient Semiconductor Electronics had liabilities of NT$5.74b falling due within a year, and liabilities of NT$1.45b due beyond that. On the other hand, it had cash of NT$3.91b and NT$4.98b worth of receivables due within a year. So it can boast NT$1.70b more liquid assets than total liabilities.

This short term liquidity is a sign that Orient Semiconductor Electronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Orient Semiconductor Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Orient Semiconductor Electronics grew its EBIT by 113% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Orient Semiconductor Electronics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Orient Semiconductor Electronics has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Orient Semiconductor Electronics generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Orient Semiconductor Electronics has net cash of NT$2.54b, as well as more liquid assets than liabilities. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in NT$2.6b. So we don't think Orient Semiconductor Electronics's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Orient Semiconductor Electronics , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.